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Suspended EEA life settlement fund overvalued by $100m, says auditor

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The suspended EEA Life Settlements fund’s latest annual report has arrived – accompanied by a critical statement from its auditors.

In its audit of the fund’s annual report for the year ended 31 December 2011, Ernst & Young says the fund – which was suspended in November 2011 after the FSA labelled traded life policy investments as “toxic” – is worth less than the $871m(£575m) valuation given by its directors.

E&Y says: “The maximum reasonable value that could be attributed to the investments in life policies at 31 December 2011 is approximately $100m less than the value recorded in the financial statements based on the available evidence at the year end.”

It added: “We consider that profit and net assets are overstated by at least $65m.“

E&Y also states that it was “unable to form an opinion as to whether the directors exercised appropriate judgement in calculating the Policy NAV and hence whether they issued and redeemed shares at appropriate NAVs”.

It found that it was also unable to form an opinion as to fees, including management fees and performance fees, “were calculated properly”.

In December 2011, the board of the EEA Life Settlements fund suspended dealings after becoming inundated with unprecedented levels of redemption requests from investors after the FSA described life settlement funds as high risk, toxic products.

One of the criticisms levelled by E&Y notes that life expectations have not been updated since the purchase of the life policies for most of the portfolio, which it believes will have led to an understatement of the expectation of life for the remaining policies.

The annual report also says the EEA Life Settlements fund is likely to remain suspended until a restructuring is completed.

Last year, the group outlined three options for investors when it reopens – remaining invested, opting for run-off shares that will see money returned as policies mature, or the selling off of holdings to institutional investors at a discount.

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. But… but… I thought it was all the wicked FCA’s fault. The article is being slightly disingenuous in directly linking the suspension to the FCA’s statement – many of these funds were in trouble before the FCA made its statement, that’s why they made the statement in the first place.

    If the fund is overstating its assets then damn right you get out as soon as possible – if the fund is overvalued and you’re last in the queue to claim your share, it’ll have run out of money.

    The statement that life expectations have not been updated is interesting – and by that I mean one of those mixtures of ‘shocking’ and ‘not really that surprising’. The investment case for these funds always relies heavily on the clairvoyance of the actuaries to predict which lives assured are going to die earlier than the value of their policy indicates. It is also reliant on the assumption that life expectancy will not increase beyond expectations – as it has done for, er, the whole of recorded human history. So not really that surprising that they have been ignoring this inconvenient truth.

    Hey, at least it’s uncorrelated with the stockmarket.

  2. I know that everyone loves to hate life settlements
    And the EEA, but forgive my ignorance is this such a damning audit? I have not seen it. Is the most that EEA could be accused of is over optimistic valuation of their assets. Someone said on here last year that 2011 was not good for maturities, but that 2012 was better. Opinions from better minds would be appreciated

  3. James Hurdman 3rd July 2013 at 9:22 am

    I have nothing against actuaries, but maybe the lesson to learn is that if the value of a retail fund needs to be calculated by an actuary, avoid it.

  4. The banks have been overstating their asset values for years, but they haven’t been targeted by FCA like EEA have been. For God sake Co-op bank is short of £1.5 Billion

  5. Two simple questions:
    a) Only by $100m? Shurely shome mishtake.
    b) Errr. Wasn’t it E&Y who has been happily passing the audit in previous years?

  6. So we all trust the words of auditors – arent these the same people involved in the banking crisis?

    Spot on Simon Hall | 3 Jul 2013 9:42 am

  7. @Anon 9.14

    During the eighteen months of suspension, the fund has had maturities (soemthing like $200m of them), but only enough to pay premiums and (massive performance) fees. So, basically its managing to self-perpetuate but not to generate any shareholder value.

    Not grounds for any celebration, nor optimism, nor much justification of a valuation of 67 cents in the dollar.

  8. It is also worth noting that these are the accounts for year ending 31 December ***2011***. How is the fund actually doing now? God knows.

    (Literally. Only He knows the hour of man’s passing, and therefore God is the only entity in the universe who knows what the actual value of this fund is.)

  9. Seamus Kavanagh 3rd July 2013 at 11:43 am

    The fact that the FSA perpetrated a self-fulfilling prophesy harming investors with its comments and actions concerning life settlements should be widely known by now. Bryan Jones, “sean”, Simon Hall and others are, to one degree or another, on point with respect to the culpability of the auditors. However, a little digging into the methodologies in play with respect to the definition of the term “maturities” and the egregious fee structure favoring management in this fund is warranted. Those who have not done so in the past may do so now and what they will find will add context to the story here.

  10. Any fund/saving plan which does not mark to market is attractive to to those who should not be given responsibility to manage:
    State pension
    Made off ( 🙂 )
    Stanford
    With profits
    Db Schemes
    Life settlement
    Reits et al
    SERPS in
    Guaranteed income on timber in the back of beyond
    Litigation funds

    Stick with S&P 500 type shares there is plenty of return/risk in this type of bracket. It’s liquid and no actuary/off balance sheet/ bvi/ private equity fund/ government/ top 4 accountant will cheat you.

  11. Few other things to note based on my quick reading of the accounts, read yourself here for the full picture:

    http://www.eeafmg.gg/PDFs/Life_Settlements/Annual%20Report%20(Consolidated)%20December%202011.pdf

    The performance fees are based on the valuation of the life policies and the valuation methodology was changed for this reporting year. That’s what the auditors are unhappy about. The fund says the fair value is $871M. The auditors say the maximum fair value is $771M

    The ‘value’ of the policies is based on the assumed date of death until the person survives past it when they use a new valuation based on the new estimate of nurses.

    Performance fees in 2011 amounted to $33M. The fee is 75% of all gains over 8% per annum split equally between the manager and investment adviser.

    Section 18 of the report outlines the risks with one interesting and important statistic. Namely the sensitivity of the fund to incorrect assumptions about when the policyholder is going to die (listed under heading ‘Longevity Risk’). The valuation of the fund in the accounts is $871M. However, if policyholders lived an average of an extra year the true valuation would be $663M. An extra two years would make it $483M.

    The expected deaths don’t appear to be happening as planned. In the period 31 Dec 2011 to 31 May 2013, net death benefits were $186M compared to an expected amount on an undiscounted basis of $484M.

  12. Henry Armstrong 11th August 2013 at 8:52 am

    Peter Winders told us that the fund was “doing what it said on the tin”. We should have read what it actually said on the tin. “Do not consume”, perhaps?

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